Cisco Renews Optical Focus With CoreOptics
The deal, announced this morning, is big on many levels. It's an example of vertical integration becoming more popular in the optical world, and it could give Cisco a legitimate play in the world of packet-optical transport systems (P-OTS).
And then there's the fact that Cisco is making an optical move in the first place. It's been more than a decade since the acquisition of Cerent, the startup that yielded the ONS 15454 platform, and several years since Cisco released any major optical product.
"They've been in the optical space very quietly, and they really haven't made that full step forward. People have asked, 'Are you serious about this? Are you not serious about this?' " says Eve Griliches, an analyst with ACG Research . "They've got a strong optical team in the company. They just haven't had strong optical products recently."
"Their optical business grew 15 percent a year -- faster than the market -- and Cisco's always talking about growing the company 15 percent a year," says Andrew Schmitt, an analyst with Infonetics Research Inc. "I think they finally got the attention with senior executives at Cisco that, hey, optical's back, at least for what they're doing."
Both analysts agree that the price wasn't high and that Cisco can easily get its money out of this. CoreOptics had raised at least $90 million in funding. (See The CoreOptics Story.)
Cisco could not immediately be reached for comment, but we'll have their commentary in a followup story.
The 100G angle
CoreOptics makes high-speed transponder modules, including a Coherent 40-Gbit/s model that was shown off at OFC/NFOEC in March. (See CoreOptics Does Coherent 40G.) But Cisco's real objective might be to apply that coherent technology to 100 Gbit/s, says Andrew Schmitt, an analyst with Infonetics.
"I don't think it has as much to do with 40G coherent as getting the assets and expertise to do their own 100G coherent," Schmitt says. "If you look at what Alcatel-Lucent (NYSE: ALU) has been doing -- and Huawei Technologies Co. Ltd. and Ciena Corp. (NYSE: CIEN), through the Nortel Networks Ltd. acquisition -- they all had this in-house, and I think Cisco was nervous relying on the supply chain for this."
The chatter around the industry is that systems vendors are starting to consider vertical integration -- ownership of their own optical components -- as a way to differentiate their products. (See Can Vendors Build Their Optical Components? and Vertical Integration Takes Its Lumps.)
It would also be a way to keep tighter control over product roadmaps and quality, something that was an issue with 40 Gbit/s. AT&T Inc. (NYSE: T), a very early adopter of the technology, ran into serious problems that it traced down to one chip. (See AT&T: 40G Was Faulty.)
"Somebody like AT&T doesn't want to see that happen again," Schmitt says. "The major carriers are undertaking multiyear planning cycles to do this, and they want to know that when they select certain vendors, they're going to have the technology when it's needed."
A P-OTS pick
Having in-house optics could also be a first step toward creating a new optical platform. Cisco has eschewed P-OTS, by most analysts' definitions, in favor of IP over DWDM (IPoDWDM), an architecture where the optical transponder gets absorbed onto the router.
Griliches is convinced that this acquisition is aimed at a P-OTS creation.
"I think this is more a packet-optical plan than IPoDWDM, and it puts them in the top three contenders for the Verizon Communications Inc. (NYSE: VZ) RFP," she says, referring to the new breed of packet-optical system that Verizon wants in its optical backbone. (See Verizon Rethinks Long Haul.)
Cisco's entry would be important, because it's the packet half of P-OTS that is actually the more difficult half," Griliches contends. "I believe it's actually going to come down to the routing vendors."
Analysts think Cisco will continue to pitch IPoDWDM. "They didn't mention IPoDWDM, but I imagine it's going to be about 300 milliseconds before they do," Schmitt says. But he notes that the technology hasn't had much impact on the market. "If you look at major purchasers of equipment, they don't want to have the long-reach optics in their routers, period. It's the same thing with session border controllers. They don't want all the layers and all that different functionality in in the same box."
Winners and losers
The CoreOptics deal would be an inconvenience for the vendors already using the company's 40-Gbit/s coherent modules. That would include Nokia Networks and, analysts believe, Ericsson AB (Nasdaq: ERIC) and Fujitsu Network Communications Inc.
The good news is that they'll have options, Mintera Corp. and Opnext Inc. (Nasdaq: OPXT) among them. And any startups working on 100-Gbit/s coherent receivers would have technology applicable to 40 Gbit/s, Schmitt points out: "So there are going to be a lot of options for 40G coherent."
Still, replacing an optical component is a big deal at the systems design level, because it can mess up the system's optical budget. "So, it's going to be a pain in the butt for the other guys, but it's not disastrous," Griliches says.
Who else might be hurt by the deal? Alcatel-Lucent, one of the few companies with solid packet and optical expertise in-house, would see a major router competitor beef up on the optical side. And Juniper Networks Inc. (NYSE: JNPR), basing its optical roadmap on a Nokia Siemens partnerships, would see the stakes rise in the optical market.
"This would have been a very good move for Juniper to have made," Griliches says.
And then there's Mintera. Unlike Opnext, a diversified optical components company, Mintera is a startup that's staked its business on high-speed transponders. And in a way, the Cisco/CoreOptics deal could be a negative for the company.
"It might get them more business," Griliches notes, "but it definitely signals to Mintera that they were not the chosen one in this, either."
— Craig Matsumoto, West Coast Editor, Light Reading